Secret £1bn deal to insure Saudi arms contract

The government has secretly agreed to pay the arms firm BAE Systems £1bn in the event that the Saudi regime, one of the company's main military customers, collapses.

The insurance arrangement, which is not detailed in any public documents, has been made through the Department of Trade and Industry's export credits guarantee department (ECGD). If the Saudi royal family falls and a successor refuses to pay its debts, BAE, which is under corruption in vestigation in London, will be compensated by the government. The UK Treasury is already burdened by a string of other foreign bad debts.

The Saudis are committed to handing over £1bn-worth of oil every year to BAE, in return for the firm virtually running the Saudi air force.

BAE has nearly 5,000 staff inside the country, and the Saudi income is crucial to the fortunes of Britain's biggest arms company. It is believed to provide more than 20% of its profits. But Saudi willingness to continue paying came into question last week, when BAE unexpectedly warned of a reduction in future Saudi profits thanks to what was described as a decision to have greater "local content".

The company is under investigation by the Serious Fraud Office over allegations that a £60m "slush fund" paid a Saudi prince to keep its contract income flowing.

BAE is by far the ECGD's biggest customer, but this fact is not disclosed in its annual report. The ECGD has been accused of benefiting a coterie of big arms firms at taxpayers' ex pense. But it has promised in recent years to come clean about the guarantees it issues.

It now publishes an annual list, which claims to detail the deals it has done, and the countries and companies they benefit. But its biggest single commitment, the BAE deal with Saudi Arabia, appears nowhere on the list. The £1bn figure is listed in the accounts under an obscure entry reading: "Other insurance."

The agency issued total guarantees of £2.99bn last year. The "invisible" BAE deal represented nearly 40% of that total. A Guardian analysis of ECGD's accounts shows that in each of the past three years the ECGD has provided BAE with slightly more than £1bn of cover for its Saudi arms deals.

This appears to represent the amounts which the Saudi regime is due to hand over to BAE annually in return for spare parts, maintenance, crew training, ammunition and missiles for Tornado and Hawk warplanes, originally sold under the huge Al Yamamah arms purchase.

ECGD insures export deals which are too risky for the pri vate market to touch. BAE appears to have paid a steeply increased premium last year, of approximately £35m, as against less than £9.5m three years earlier.

This may represent fears of an increased risk of instability in Saudi Arabia, whose regime, often accused of corruption, is a prime target of Islamist fundamentalists.

During the Thatcher and Major Conservative governments, the ECGD lost huge sums of taxpayers' money in bad debts by subsidising companies to export to unstable regimes. A total of almost £10bn in bad debts has been accumulated by the agency, including interest, although it claims that it still has hopes of recovering up to 37% of them.

The ECGD claims it keeps insurance deals secret because if the purchaser knew the supplier was insured, it might tempt them to default. Asked how this could apply to a government-to-government deal such as the Saudi contract, the ECGD refused to answer. Asked why the published accounts were misleading, in concealing the identity of their largest cus tomer, and the fact that the taxpayers' biggest exposure was to a single arms deal with Saudi Arabia, it also refused to answer. BAE said: "Contracts covered by the ECGD are commercial in confidence."

The ECGD's decision to keep its biggest deal secret is likely to be an early test for the Freedom of Information Act, which comes into force next month. The Guardian is to appeal under the act against the government's refusal to release information about the Saudi deal.

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